proKNM signs EPC agreements with Zecon, GAP

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OIL AND GAS HUB: In the event everything goes through as planned, OSK Research believes that the news can be positive for KNM’s orderbook replenishment. Currently, the group’s orderbook is believed to be above RM5 billion while its tenderbook is over RM17 billion.

KUCHING: KNM Group Bhd (KNM) announced that it and Zecon Bhd (Zecon) had entered into two heads of agreements with Gulf Asian Petroleum Sdn Bhd (GAP).

The first agreement en­tailed undertaking an engi­neering, procurement and construction (EPC) contract for a 150,000 to 200,000 barrel per day petroleum refinery and 400,000 to 525,000 metric tonnes per annum polypro­pylene unit for GAP with a total project value of US$5 billion (RM15 billion).

The second agreement was for the undertaking an EPC contract for a petroleum product storage terminal facility comprising four terminals with total storage capacity of 2.3 million cubic meters, complete with sup­porting infrastructure and auxiliaries, including a jetty with a contract value of RM2 billion.

OSK Research Sdn Bhd (OSK Research) had stated in a research report that both projects would be located in Teluk Ramunia, Johore where the state government had approved about 650 acres of land for these the projects.

The salient terms of the head of agreements included KNM forming a consortium with Zecon to undertake the EPC contract of about RM2 billion and a special purpose vehicle (SPV) company be formed to undertake the project.

The estimated equity value for the SPV company was RM200 million. KNM ex­pected to subscribe for up to 30 per cent equity in the SPV company while the balance 70 per cent would be held by GAP.

In addition, KNM and GAP would form a joint venture company to undertake the operation and maintenance of the facilities upon project completion for 25 years, with the first five years having a reputable operator as its partner.

The parties agreed to start preliminary works on the project development immediately and targeted to achieve financial close within three months and completion of the entire project 18 months after fi­nancial close.

They agreed that GAP would arrange for finan­cial guarantee from a local investment fund for up to RM1.5 billion during the construction period to be converted into long term loan thereafter and a facili­tation fund of up to RM300 million.

Meanwhile, KNM would arrange a sukuk issuance of up to RM1.5 billion to cover project financing during construction.

The report commented, “We believe the kick starting of these two projects is in line with the Malaysian govern­ment’s objectives to develop Johore into Malaysia’s oil and gas hub, especially for petrochemical and storage facilities, to compete with neighbouring countries like Singapore.”

“In the event everything goes through as planned, this could be positive for KNM’s orderbook replenishment. Currently, we believe its orderbook is still above RM5 billion while its tenderbook is over RM17 billion.”

The refinery and polypro­pylene project’s first finan­cial impact on KNM would be to the tune of RM540 million (with KNM’s portion possi­bly at RM180m) for the 20 per cent equity stake in GAP.

However, the research house noted that the amount would be shared by three par­ties (including KNM) based on their equity portion in the consortium, which had not been decided to date since the third partner had not been finalised.

Based on its calculations, OSK Research believed KNM would have the financial muscle to take up this prelim­inary investment of RM240 million as its net gearing was still below one.

Based on its first quarter financial year 2011 (1QFY11) results, it had net debts of RM534.6 million with total debts of RM1 billion and cash and cash equivalents of RM479.5 million, leading to a net gearing of 0.3 times.

Although these two projects could potentially contribute positively to KNM’s FY12 to FY15 earnings, OSK Re­search kept its FY12 forecasts unchanged for the time being pending more financial guid­ance from KNM.

In wrapping up the report, OSK Research maintained its fair value pegging for KNM unchanged at RM2.80 per share, based on a price earn­ings ratio of 13 times FY12 earnings per share.